On Jun 12, 2014, we issued an updated research report on leading freight service provider Norfolk Southern Inc. (NSC). The company will likely benefit from favorable pricing revisions, continuous investments in infrastructure and abundant opportunities within the transportation business sector. However, weak performance of the export coal segment may hold back its momentum in the quarters ahead.
We remain encouraged by Norfolk Southern’s growth across its Intermodal and Merchandise segments along with a better outlook for utility coal. Merchandise is expected to benefit from crude, frac sand and shale-related liquid petroleum gases’ shipment. Automotive shipments will also boost the segment owing to increased vehicle production in North America that is projected to grow around 3% in 2014. Meanwhile, increased steel usage in auto and construction sectors will likely drive domestic steel production by 5% in 2014.
On the other hand, Intermodal will continue to benefit from new businesses arising from truckload conversion to rail intermodal services and improvement in international shipping patterns. Norfolk Southern also remains committed to improve its service and efficiency across its double stack network.
The Norfolk, VA-based company remains committed to developing new markets, investing in infrastructure capacity and providing the most cost efficient service to its customers. Further, the inauguration of South Carolina inland port and the new Charlotte terminal in the fourth quarter of 2013 is generating solid demand. Norfolk Southern is optimistic about its prospects, going ahead. The company aims to generate over $100 million in productivity and leverage gains in 2014.
However, a weak coal business continues to hurt the company’s revenues. Management expects low export coal volumes owing to weak commodity pricing and increased foreign competition. We believe coal volume continues to be impacted by oversupply and a competitive global coal market.
The domestic metallurgical coal market is also expected to remain under pressure due to plant closure and sourcing shifts. Additionally, paper and forest divisions within the Merchandise segment will face challenges owing to shrinkage in graphic paper construction. Other potential risks faced by the company include regulatory issues, volatile fuel prices, labor problems and competitive pressure.
Currently, Norfolk Southern carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Better-ranked stocks within the industry are GATX Corp (GMT), Trinity Industries Inc. (TRN) and KansasCity Southern (KSU). GATX and Trinity sport a Zacks Rank #1 (Strong Buy) while Kansas City Southern carries a Zacks Rank #2 (Buy).